Building schools in the future: bid costs and cancelled projects

The government has announced that many Building Schools for the Future (BSF) projects have been cancelled. The work still needs to be done. It’s just that Building Schools for the Future has, for many, become “building schools in the future”.

Unsurprisingly, there is quite a bit of debate on this topic. See for example, the article in the Guardian about whether local authorities who have incurred cost in relation to cancelled projects should be compensated. If contractors and consultants can demonstrate “detrimental reliance”, as referred to in the article, can they also make a claim?

The classic law school case is Blackpool and Fylde Aero Club v Blackpool BC, in which the Court of Appeal found a very limited contract to consider all tenders submitted in the correct form by a given deadline. However, this gives cold comfort if the contracting authority considers the tenders, but does not award a contract at all:

“A tendering procedure of this kind is, in many respects, heavily weighted in favour of the invitor… The invitee may often, although not here, be put to considerable labour and expense in preparing a tender, ordinarily without recompense if he is unsuccessful.” (Lord Justice Bingham.)

As a general rule, most bidding procedures will expressly preclude the tenderers from recovering their costs, if they are unsuccessful or the project does not go ahead. One of the main reasons for this is that paying tender costs would add to the price of construction projects. But the money for tendering has to come from somewhere. The overhead recovery or margin secured by a contractor for each successful bid has to pay for the cost of unsuccessful bids. So, owners will always pay the bidding costs, but in a more general and aggregated sense, rather than on a project-by-project basis.

Although there are projects where bidding costs are paid, these are rare. They tend to be projects where the cost of bidding is so high that there is a danger that contractors will not participate unless there is some payment. Owners have to be careful not to pay too much. Otherwise, there is a risk that contractors will participate simply to recover the bidding cost, rather than because they want the job, and will price accordingly.

Perhaps an aggregated system is better for normal projects. Everyone knows that they pay for the cost of unsuccessful bids. But the aggregation means that contractors only bid for the projects which they think they have a chance of getting, or where they need to be “seen” to be bidding.

There is a danger for owners who:

Cancel projects.

Put too many bidders on the tender list.

Make the bidding process very expensive.

A reputation for doing this will disrupt the aggregation. Those owners could find that, in the future, they will end up paying more for their construction projects (or getting fewer bidders) because of the perceived risk.

See, for example, the report of the National Audit Office on PFI from 2007:

“The private sector is becoming more selective in developing detailed bids for PFI projects, in part due to the cumulative impact of lengthy tendering periods and high bid costs. One in three projects that closed between 2004 and 2006 had [only] two detailed bids… compared with one in six… prior to 2004. …It was comparatively rare for these procuring authorities to choose to eliminate weaker bids: the choice was effectively out of their hands. …the absence of a third bid removes the possibility of having a ‘second opinion’ benchmark on value for money. It also leaves the procuring authority vulnerable if one bidder subsequently pulls out.”

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